UBS to Resolve LIBOR Scam with $1B?

UBS AG (UBS) is said to be nearing a deal to pay a penalty of over $1 billion over its alleged involvement in the manipulation of the London Interbank Offered Rate (:LIBOR), according to a Wall Street Journal report. The announcement regarding the settlement is most likely to come next week. Since negotiations are still underway, the final amount could alter.

As a matter of fact, UBS has been subject to scrutiny over this issue for quite some time by the U.S. Commodity Futures Trading Commission, the Justice Department, the U.K. Financial Services Authority, and the Swiss regulators.

In addition to UBS, several of the big banks including Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) are under the strict vigil of the regulators around the world in connection to the LIBOR manipulation scam.

The LIBOR is determined on the basis of estimates of rates at which banks find it appropriate to borrow from each other. It is alleged that banks coordinated amongst themselves and submitted false rates. This fraudulent move was made to profit from trades or to appear more creditworthy than they actually are.

Since LIBOR is used as a benchmark for several lending transactions around the world, any manipulation would impact billions of users around the globe. Hence, regulatory authorities are investigating the matter thoroughly and plan to put forward an exemplary judgment so as to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers.

Earlier in the year, Barclays Plc. (BCS) admitted to its fraudulent practices and agreed to pay a penalty of $450 million for rigging the LIBOR. If UBS is imposed with a fine of over $1 billion, it would significantly dwarf the Barclays penalty amount. On the other hand, Royal Bank of Scotland Group Plc. (RBS) also hopes to achieve a settlement early next year.

Currently, we remain skeptical regarding UBS’ penalty amount and wait to see what the final amount comes up to. While the settlement will put to rest a long-drawn investigation and UBS can breathe relief, we believe that it will adversely impact its financials.

Also in November, the company was slapped with a fine of £29.7 million ($47.6 million) for failing to prevent significant unauthorized trading that resulted in a substantial loss totaling $2.3 billion. The losses were incurred mainly on exchange traded index future positions. The penalty was imposed by the British authorities, The Financial Services Authority (FSA).

Notably, UBS’ business has been severely impacted by the financial crisis and the company suffered huge losses on credit bets during that time. However, the Swiss government came to its aid and currently the company, along with Credit Suisse Group (CS), is subject to stringent capital norms. Moreover, the tax probe and mounting legal claims have added to its woes.

However, amidst such crisis and a challenging operating environment as well as increased capital needs, in recent months, the company announced overhauling measures, which are aimed at developing its core businesses and downsizing its distressed units.

While these are encouraging, we believe the troubles for this stock are far from over. Hence, for UBS, which currently retains a Zacks #4 Rank, implying a short-term Sell rating, we believe that following the final announcement of the penalty, estimates could go down leading to a deterioration in its Zacks Rank.